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Climate change is having significant physical impacts across the globe and is disproportionately affecting individuals and groups with greater vulnerability and exposure. The world is now grappling with its undeniable impacts on ecosystems and societies – from scorching temperatures to ferocious storms, wildfires and floods – and these climate hazards are only expected to intensify in magnitude and grow in number. Global temperatures in 2023 were more than 1.4°C warmer than pre-industrial levels and the global mean temperature for the past twelve months (Feb 2023 – Jan 2024) was the highest on record. “Even temporarily exceeding this warming level will result in additional severe impacts, some of which will be irreversible,” according to the IPCC. These extreme events not only impact our daily lives but have also caused massive economic losses.
Natural disasters worldwide caused US$268 billion of economic losses in 2020, with insurance covering only a fraction of this figure. Future intensification will put even more organizations at risk, and those in the Asia-Pacific region are no exception. Southeast Asia is poised to lose up to 11% of its GDP by 2100 due to climate change impacts, according to the Asian Development Bank, while the Australian government identifies the financial impacts from heat stress-induced lost productivity alone to be as high as A$423 billion by 2063.
Despite the increasing sense of urgency in the media regarding climate change, companies have been slow to adjust their business operations to mitigate and/or adapt to the tangible risks posed by climate change. This is in part due to their unpredictability and the challenge of translating complex climate risks into direct or indirect impacts. There is also a lack of unanimity among decision-makers about the urgency of climate risks, which “implies sub-optimal alignment and decision-making, heightening the risk of missing key moments of intervention,” according to findings from World Economic Forum’s Global Risk Report 2024.
While the report’s GRPS (Global Risks Perception Survey) highlights a “deteriorating” global outlook and “a predominantly negative outlook for the world over the next two years that is expected to worsen over the next decade,” opinions on when during the next decade climate risks will rise to the top of the list of global concerns varies depending on the respondent. Younger respondents tend to rank climate risks as more pressing over a two-year period compared to older age groups, who take a longer-term view. The private sector highlights various climate risks as top concerns over the longer (10-year) term, in contrast to respondents from civil society or government, who prioritize these risks over shorter time frames.
Given the varying opinions on the urgency of the risk, climate risk assessments and disclosures tend to be driven by external pressure from investors, regulators, and other stakeholders.
Organizations should realize, however, that there is intrinsic value to be realized by making adaptation and resilience to climate risk key parts of the decision-making process, with significant upside beyond compliance alone.
It can spur innovation in future-proof technologies and products, create growth opportunities and avoid current and future costs both for your company and its value chain, fostering trust in the communities in which it operates. Companies must embrace climate adaptation and take resilience measures now to proactively seize the benefits of making the necessary adjustments and building climate-resilient businesses, preserving long-term value in the process.
As climate adaptation and resilience emerge as top priorities for leaders in the public and private sectors, climate risk reporting is also being pushed into the foreground. Significant progress has been made on climate reporting since the Task Force on Climate-Related Financial Disclosures (TCFD) released its initial recommendations in 2017, designed to help companies provide better information to support informed capital allocation.
The TCFD has fulfilled the climate-related disclosure monitoring role since its inception in 2015, but as of 2024, this responsibility has been taken over by the International Sustainability Standards Board (ISSB). The ISSB has two standards: IFRS (International Financial Reporting Standards) S1 provides a “core baseline” for sustainability reporting, including emissions across all scopes and waste management, explaining how to report these factors alongside financial information; IFRS S2 sets requirements for reporting on climate-related risk, opportunities and adaptation.
The TCFD found that in 2022, 80% of companies published information aligned with at least one of the 11 TCFD-recommended disclosures. While only 4% are fully aligned with all 11, the number of disclosures addressed per company has increased by an average of 32% over the past five years. The report also finds that 70% of companies globally include TCFD disclosures in financial filings and annual reports, compared to 45% for fiscal year 2017.
Zooming in on APAC, the same report finds the average disclosure rate of recommended disclosures to be at 36%, an 11% increase over the prior year, while 56% of companies in APAC have disclosed climate-related metrics.
This reporting momentum is catalyzed mainly by external drivers, such as increasing pressure from regulatory bodies, investors, and ESG (environmental, social and governance) frameworks.
These groups are increasingly looking to mandate climate risk reporting. IFRS S2 builds upon TCFD recommendations by requiring reporting companies to disclose more detailed information about governance processes, strategies, and risk management approaches. With a focus on broader impacts to the business model and value chain, IFRS S2 is not just about compliance, but also about how climate change will impact company value. It sets metrics and targets that organizations can use to assess their progress to 2050 and the impact of climate risk on financial performance.
TCFD-aligned and ISSB-aligned sustainability disclosures have or are planned to become a requirement across eight APAC jurisdictions.
Looking beyond the APAC region, the US Securities and Exchange Commission (SEC) is considering a rule change that would require climate-related disclosures to be included in organizational reports, aimed at providing investors with decision-useful information. Meanwhile, the Corporate Sustainability Reporting Directive (CSRD), which will enter into force in 2024, requires EU-based organizations to report on climate risk, alongside other topics across the three ESG pillars.
This recognizes the value of climate risk disclosures and expects issuers to have a climate strategy in place. This is a positive development for corporations, as companies with strong climate adaptation and resilience strategies can hedge themselves against the uncertainty of future climate impacts. This stability attracts investors. Better performance in ESG scoring also fosters higher investor confidence and leads to increased access to capital markets and debt raising.
These Frameworks are backed up by the TCFD 2022 Status Report, which finds that 90% of investors use information from climate-related financial disclosures in decision-making, with 66% also using TCFD-aligned disclosures to price financial assets. Likewise, the UN Principles for Responsible Investment (UN PRI) and other investor groups collectively representing US$103 billion in assets, have called for climate risks to be reflected more in corporate reporting. Companies have responded, with 77% of those that implement TCFD disclosures saying they are motivated by investor expectations.
These frameworks facilitate the disclosure process by standardizing the criteria for climate risk reporting. As noted, the ISSB standards, published in 2023, provide a common TCFD-aligned framework with a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities (IFRS S1), and a set of specific climate-related disclosures reporting (IFRS 2).
Having a fragmented landscape of voluntary standards and requirements adds to the cost, complexity, and risk of disclosures for companies and investors alike. Frameworks such as the ISSB therefore seek to develop a baseline of sustainability disclosures helping companies to report what is needed to attract investors across markets and facilitate international comparability to attract capital.
While compliance and regulatory pressure may be the leading motivators for initiating a climate risk assessment and disclosure process, embracing climate adaptation is key to integrating risk into decision-making at all levels of an organization. Climate adaptation strategies give organizations an opportunity to rethink the way they look at risk and future-proof their business operations while creating opportunities across the value chain. They help companies see adaptation not as a cost but as an investment that makes good business sense, and as a strategic move that protects a company’s market value rather than being nothing more than a compliance requirement.
Expected Downside of Physical Climate Risks Expressed as Percentage of Market Value – Asia Pacific Investable Market Index
Given the vulnerability to climate-related risks of these major industries and their resources, supply chains, and operations, comprehensive climate risk adaptation should be part of long-term strategic planning. It enables companies and investors alike to make informed, long-term decisions, including adjusting strategies to strengthen resilience, mitigate those risks, and potentially capitalize on opportunities arising from climate-related changes.
Corporations should give more consideration to the upsides of implementing a comprehensive climate adaptation strategy. A positive financial impact is just one of the key benefits of taking and reporting adaptation measures. Investors want companies to demonstrate how the pieces of their disclosure form a coherent whole, spelling out the links between risk and opportunity, analysis targets and strategy.
This transparency brings reputational benefits for one’s brand, along with many positive outcomes, such as higher investor confidence by reducing investment risks and avoiding damages and losses.
Identifying climate risks and opportunities and implementing mitigation and/or adaptation measures is a difficult but necessary task. There is a logical flow of actions for tackling climate risks and implementing a robust climate change strategy as recommended by the TCFD.
Step 1: Climate Change Risk and Opportunity Identification and Prioritization
By undertaking a baseline risk assessment across a value chain, followed by scenario analysis in the next step, it’s possible to see where risks are concentrated, and how to make strategic decisions to counteract them. A baseline assessment entails identifying climate risks to determine exposure and vulnerability to events that may impact the organization’s operations, supply and distribution chains, employees, communities and environments. This process identifies opportunities to provide a viable economic and climate-resilient future for the business.
Step 2: Climate Scenario Analysis
Conducting scenario analyses may sound daunting but it can help businesses navigate uncertainty by providing clarity on the best- and worst-case outcomes, and the timelines over which these may occur. It is important to qualify and understand the various material risks before trying to quantify how they may impact the financial performance of the company through loss of revenue or damage to assets. Impacts can be estimated by building financial impact curves through scenario modelling. The outcome of this analysis is typically a set of impact curves that show impacts from climate risks over time across modelled scenarios, helping stakeholders determine acceptable risk tolerance thresholds.
Step 3: Response Strategy
Translating the climate scenario results into meaningful, tangible actions can be the most challenging step. Here are some strategies a company can adopt in response to the imperative to reduce its carbon footprint and strengthen its ability to withstand and recover from disruptive events or chronic conditions caused by climate change:
Step 4: Setting Metrics and Targets
The relevant metrics and targets are those the company sets as part of both its energy transition and climate adaptation plans, such as total emissions, financial impacts, and decarbonization targets. Metrics and targets should link back to the main risks identified and modelled under scenario analysis (Step 2) to provide the company with clear data on how its risk exposure will evolve over time. A comprehensive scenario analysis done in prior steps should also support the use of appropriate trigger points wherein metrics exceed identified acceptable thresholds, prompting the company to act on its response strategy.
As climate-related impacts accelerate, companies need to adapt to preserve and enhance their long-term value, which includes assessing their long-term business outlook before investing in climate mitigation measures. Factoring climate risks into long-term business expansions or mergers and acquisitions can prevent poor investment decisions and help identify adaptation opportunities others may not see.
To build resilience, an organization should develop a transition plan that lays out a set of targets and actions supporting its transition toward a low-carbon economy, including actions such as reducing its GHG emissions. They should plan adaptation measures and disclose the results to stakeholders. While the lion’s share of attention has been given to the former (climate mitigation), less has been given to the latter (climate adaptation), even though adaptation is a huge business opportunity for investors as well as organizations.
For instance, upgrades to infrastructure are becoming more crucial in regions that are highly exposed to climate extremes – and which are often important cogs in global supply chains. Disruptions to supply chains interrupt manufacturing and delivery of goods, raising costs of materials, prices of products, and hurting corporate revenues. With such imminent risks of disruption, organizations should be preparing their supply chains to become resilient and climate adaptive.
Being a first mover by recognizing the risks and investing in adaptation projects can deliver a wealth of benefits, and companies with a proactive approach to climate adaptation are already reaping them. Improved ESG performance and disclosure can help unlock access to capital markets and debt raising to make those investments.
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